A good friend in Singapore, who is one smart dude, and former head of Goldman Sachs’ Asia asset management, pointed out the S&P500 trades almost tick for tick with the Euro and the Aussie currencies. This is reflected in the table showing the Australian Dollar and S&P500 have moved together a stunning 73% of the past 100 days and 76% of the last 200 trading days. The Euro is somewhat less correlated and Japanese Yen moves inversely with S&P500 65 percent of the trading days.

It is also clear from the correlation chart that a structural shift has taken place since the 2008 financial collapse. The 30-day correlation of the S&P500 and Aussie dollar, for example, has moved from a relatively random relationship to a consistently high positive correlation, in a range of .75-.98.

We have kicked it around with our friend for hours at a time, trying to understand why the U.S. stock market is so highly correlated with the Australian Dollar? “Risk on/risk off” is too simplistic and general. Trying to “retrofit fundamentals” to price movement is futile, in our opinion. Every observed price point takes a willing buyer and willing seller. And there are no mystical forces that move markets, though, we concede, there may be mystical forces that move buyers and sellers!

Our conclusion, which, at best, is an educated guess and a work in progress, is that since the crash and abandonment of U.S. stocks by a large segment of the investment community, trading volume is increasingly dominated by high frequency algorithms and macro strategies. There are probably sufficiently large algorithms and adequate feedback where a movement in the Aussie triggers a buy program in the S&P (or vice versa). The movement and relationship then becomes self-reinforcing as trend following algoes kick in. We have a lot more analysis to go, but let us know if you have a better explanation.

Institutionalized “investing”. Driven by a “Bernanke Put” , huge optionality in compensation of said “investors” , No pain sensors left – so you get correlated markets.
“Professional Investors” have to go all-in . They will win big for a while, even several years. Then it will blow up spectacularly. Everybody try to act surprised – who could have known etc. But its OK – no downside to said “professional investors”.
Source of all this correlation – bad money. It should be obvious to all that a bunch of guys typing numbers into a computer – enacting “monetary policy” has NO direct effect on anything real – does not create any goods or services. It does however have a huge effect on people’s motivations, their perceptions of fairness, on perceptions on what is valued in society etc – in short – their “value system”. You corrupt that process – you corrupt the value-system – you are eroding the foundations of the civilization. So you get a bunch of desperados – with nothing to lose – going all in , all the time – why not ? It is not a sign of rude health but rather a sign of extreme sickness, desperation and hopelessness.